IDEA CELLULAR: Growth to resume from 2HFY11; 27% EBITDA CAGR over FY11-13E; Raising target price to Rs90; Buy
We met the management of Idea Cellular (IDEA IN Mkt Cap US$5.3b, CMP Rs72, Buy) for an update on business trends and outlook.
- While 2Q is likely to be weak due to seasonality, we expect growth momentum to resume from 2HFY11 driven by traffic growth as well as lower RPM pressure.
- We believe that Idea is well-placed given 1) abating pricing pressure in the wireless market, 2) industry leading traffic and revenue growth, and 3) potential FCF inflection in FY12 as EBITDA growth accelerates and capex intensity declines.
- We expect 27% EBITDA CAGR over FY11-13E v/s 5% proforma EBITDA growth in FY11E and 18% CAGR during FY08-10.
- We upgrade our Target Price to Rs90 based on target valuation of 8x FY12 EV/EBITDA for core business (10% discount vs Bharti and 20% discount vs 3 yr average) and Rs4.5m/tower for stake in Indus towers. Maintain Buy.
2Q likely to be a weak quarter due to seasonality; tariff rationalization being considered
- While we expect 2Q performance to remain weak due to seasonality (<1% revenue growth QoQ), revenue growth is likely to pick-up to 4-5% QoQ during 3Q/4Q.
- Given sustained revenue market share of incumbents despite high competition over the last 4-5 quarters, there could be some tariff rationalization in the industry which would support RPM and margins.
3G launch expected in 4QFY11; low risk from MNP
- Commercial launch of 3G services is expected in 4QFY11E. Idea has the highest 3G revenue/subscriber coverage as well as VAS revenue mix amongst the major operators.
- Idea is also less exposed to potential increase in competition in the post-paid segment in key metros of Mumbai/Delhi.
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